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Survey Says TDFs ‘Widely Misused’

The good news is that most participants aren’t putting all their retirement investment eggs in one basket. The bad news is that we’re talking about target-date fund investors.

In fact, a new survey commissioned by Financial Engines suggests that among TDF users, only a quarter (26%) report using their TDFs as designed — investing at least 90% of their retirement assets in their TDF, according to the standards of the survey.

Among all retirement investors, most (58%) reported not investing any retirement assets in TDFs, while 38% reported having at least part of their assets invested in a TDF. On the other hand, 75% of those who were so-called “full” TDF users had been defaulted into those investments. (Just 15% of survey respondents had been automatically enrolled in their plan, which might have some bearing on the results.)

Reasons Why

Why is this happening? Nearly two-thirds (62%) of partial-TDF users cited a desire to avoid “putting all their eggs in one basket” — although a strong majority (81%) said that they understood that TDFs are diversified. The survey’s authors concluded from this apparent disconnect that participants were seeking diversification beyond investment diversification — for instance, diversification across investment funds or asset managers — or that they might be seeking greater personalization than TDFs offer, especially with respect to their individual risk tolerance, a factor cited by half of partial-TDF users.

One subset of respondents, individuals who had consciously moved money from a TDF investment, seemed particularly confident in their ability to manage their own investments. Two-thirds of this group were male; more than half (55%) earned in excess of $75,000 a year; and 44% claimed to think a “great deal” about investments, though only 40% claimed to understand TDFs “very well.” Nearly half — 48% — currently use a financial advisor, and 58% of that group said they were seeking more personal management or advice from an advisor.

The online survey, fielded last September, was based on information from 1,013 retirement investors who reported that their employer plan offered TDF options. All were working full-time, although only a third were female.

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